How To Create Generational Wealth For Your Family

How To Create Generational Wealth For Your Family

June 1, 2021


Written by Andrew Clarke
Four adults and a child walking on the beach during a sunset - Expanding Wallet

Have you ever thought about how some families create generational wealth that passes on for decades? People have been doing this for centuries, and if you’re in the pursuit of financial freedom, then this might be an opportunity for you too.

Saving your money and building your nest egg is typically meant to help you retire someday by providing a steady stream of passive income. However, with a few minor tweaks and some powerful motivation, it could also be used to benefit so many others than just yourself.

In this post, we’ll talk about what creating generation wealth means, why you’d want to do this, and how you do so.

What is Generational Wealth?

Generational wealth is the assets that get passed on from one generation to the next. Although the first thing you might think of is money, the term “wealth” could also come in many other forms such as real estate, personal property, business interests, and even intellectual rights (such as someone who’s entitled to the royalties of a song).

Think about if you saved up $1 million. Using the 4 Percent Rule, that $1 million should be able to provide you with $40,000 of passive income for the rest of your foreseeable life. But does the story really need to end there?

After you pass away, if that $1 million principal still exists, then it could be passed on to your children. Ignoring taxes for a minute, that wealth could now be used to provide your children with passive income. Or it could be applied in other ways that might grow or enhance its value.

Who Has Generational Wealth

There are countless examples of wealthy families throughout history that passed their fortunes on from generation to generation. Here are a few well-known ones:

  • The Rockefellers – Oil tycoon John D. Rockefeller became America’s first billionaire back in 1916. Over a century later, the family is still worth a combined $8.4 billion.
  • The Kennedys – Although most people think of the Kennedys in terms of politics (John F Kennedy, Bobby Kennedy, etc.) the family’s wealth started back in the 1920s with their patriarch Joseph Kennedy.
  • The Waltons – The founders of Walmart are currently America’s richest family with a combined net worth of over $247 billion.

For the average American, only about 20 percent of households have received inheritances over the last 30 years. This can be attributed to several different causes:

  • The high costs of nursing home care at old age
  • Outstanding debts that need to be settled first
  • Failure to save up a sizeable estate in the first place

However, it’s important to point out that death isn’t the only time you can transfer wealth. Later on in this post, we’ll explore some alternative strategies for doing this.

The Benefits of Generational Wealth

What’s great about creating generational wealth is that it can be life-changing for your family members. You can use your assets to help your children and grandchildren:

  • Pay for college and avoid student loans
  • Afford their first home
  • Pass down a family business
  • Sponsor a new idea, start-up, or venture
  • Leave behind your legacy

Simply put, generational wealth is a selfless way for you to pass on all of the sweat equity you’ve built over the years. And by doing so, you can be like an angel investor granting “once in a lifetime” opportunities to your future generations.

How Do You Create Generational Wealth?

Image of one hundred dollar bills – Expanding Wallet

If you’d like to build a fortune that you can one day pass on to future generations, then the time to start is now!

Make no mistake – this is not going to be an easy task. In fact, most people will spend their entire lifetime accumulating enough valuable assets to make a sizable impact.

However, with some forward-thinking and a lot of discipline, it can be done. Here are 9 tips for how you can build wealth for yourself and future generations to come.

1. Start with Financial Literacy

If you are to become the financial patriarch or matriarch of your family, then one of the first things you’re going to want to do is to understand the ways of money as much as possible. That means educating yourself on as many topics about personal finance as possible.

Some of the main areas that you’ll want to explore will include:

  • How to save more
  • Creative ways to spend less
  • What to invest in for long-term growth
  • How to avoid taxes and pay as little as you legally have to
  • What to do to protect your money once you have it

There are a multitude of ways you can build your financial literacy. Here are a few of my favorites:

  • Check out well-known books from the library
    • Purchase the ones you may want to review regularly
  • Read blogs
  • Watch videos on YouTube
  • Listen to podcasts
  • And so many others

No matter what type of media you choose to utilize, the thing you’ll always want to keep asking yourself is: How can I use what I’ve learned to make my situation better? As it’s often written, knowledge without execution is nothing.

2. Pass Your Financial Knowledge Down

Not only will investing in financial education benefit you, but it can also give you the right tools and strategies needed to help your children make good decisions about money. This could be done in many ways from giving them their first allowance to helping them apply for their first credit card.

Helping your children to know more about personal finance will help ensure that the wealth you pass on doesn’t go to waste. It’s been estimated that 70 percent of wealthy families will lose their money by the second generation. 90 percent lose it by the third.

To make sure all of your hard work supports family members long after you are gone, give yourself the greatest chances of success by teaching your children about money right now. Kids who have good financial role models are far more likely to also be successful at managing their finances.

3. Build Your Nest Egg

Your tax-advantaged retirement savings accounts like a 401k, Roth IRA, etc are a great place to start building your wealth. They provide several unique advantages over traditional bank and investment accounts:

  • Automatic investing. By design, your 401k and IRAs are investment portfolios. They’re intended to help you achieve long-term success by giving you access to a variety of stock and bond-based funds.
  • Compounding potential. Thanks to the magic of compound interest, you don’t have to break the bank saving your money every month to see a handsome return in the end. For instance, if you saved just $500 per month for the next 30 years, it would grow to just under $1 million!
  • Tax breaks. Remember that for every dollar you save in a tax-deferred retirement plan, you avoid paying taxes on it now in the present. That means more money for you and less going to the IRS. If you use a Roth-style account, then you get to avoid taxes at the back end when you finally retire someday.

When it comes to your retirement accounts, these factors help take a little bit of effort and turn them into something big. So, if you’re not already using your retirement accounts, now is a good time to start. To find out more on retirement accounts and how to get started read Why You Should Start Your Retirement Account ASAP.

4. Invest in Real Estate

Securities like stocks aren’t the only way families become wealthy. In fact, centuries ago one of the most common ways to become an aristocrat was to acquire land. And in a sense, that is still true even today.

The first piece of real estate that most people ever invest in is the home that they live in. Although the book “Rich Dad, Poor Dad” taught us all that a home is a liability and not an asset, that doesn’t mean you can’t still treat it like one.

For starters, remember that every time you make a mortgage payment, some portion of it is going towards paying down the principal. In theory, that’s equity that you then own, so you could almost think of it like paying yourself.

On top of that, a lot of the basic upkeep and improvements you make to your home (like a small bathroom remodel, landscaping, etc.) will go towards preserving or even increasing its value over time. To learn more about which projects have the best return on investment, check out this list from Paragon Remodeling Inc.

Other types of properties that the wealthy often invest in include:

  • A second home
  • Rental properties
  • Vacation rental
  • Commercial real estate
  • Vacant land

If you’d like the benefits of investing in real estate but don’t want to own any directly, you can do this using REITs (real estate investment trusts). These are securities that are similar to ETFs (exchange-traded funds) where large groups of investors collectively own things like commercial buildings, warehouses, apartment buildings, etc.

5. Pay Off Your Debts

If you want to be able to pass on your wealth to future generations, then you’ve got to make sure that creditors don’t have their hands out first. That means you’re going to want to ensure that all of your debts are paid off and settled.

Debts come in many forms: Credit cards, mortgages, auto loans, old student loans, personal loans, etc. If you’d like to get rid of yours as quickly and strategically as possible, then there are two great strategies for doing so:

  • The debt snowball method – This is where you pay off your debts in order from smallest balance to largest balance. As you pay each one down, roll that payment towards the next balance so that you’re paying each successive balance off faster (like a snowball).
  • The debt avalanche method – This is where you pay off your debts in order from the highest interest rate to the lowest interest rate. As you pay each one down, roll that payment towards the next balance so that you’re paying each successive balance off faster (like an avalanche).

The other thing you can do is not take on any new unnecessary debts. For example, if you’re planning on buying a new vehicle, figure out how you can save up for it in advance and pay for it with cash instead.

6. Give Your Kids a Head Start By Helping Them With College

Man holding two kids and third kid running through flowers – Expanding Wallet

Speaking of debt, it makes sense that if you want future generations to prosper, then the last thing you’d want them to do is get saddled with debt of their own at the start of adulthood, right?

I’m talking of course about student loans. Student loan debt is out of control and putting the majority of 20 somethings into tens of thousands of dollars of debt before they’ve even started their first job. That’s like starting a marathon with a broken leg.

If you’d like to give your kids the best chance of financial success, then you can help them by attempting to cover as much of their college expenses as possible. A great way to do this is to start a tax-advantaged 529 savings account as soon as they’re born.

You can think of a 529 plan as being similar to an IRA that’s intended to pay for higher education expenses. Your contributions are tax-free at the state level and get invested in mutual funds for long-term sustained growth. Even a contribution of just $50 per month can grow into tens of thousands of dollars over time. Find out more about 529 plans here.

7. Start a Business

Another well-known way to pass down wealth is to start a family business. Businesses are a unique type of legacy because they take an idea you have and turn it into something with a life of its own. If properly managed, that business can grow and flourish into something that potentially outlives even yourself.

Most businesses start with people doing something they love. This could be doing something like:

  • Running a store
  • Opening a bakery, small restaurant, or a coffee shop
  • Becoming a contractor
  • Providing some type of service (insurance, accounting, etc.)
  • Forming a real estate company

The possibilities are literally endless!

What’s important is that if you do start your own business, be sure to plan for the long term. Don’t think of it as a one-person operation where the future is uncertain beyond one or even five years from now. Dream big and plan for ways that your children and other employees can contribute to its growth.

As your children grow into adulthood, one tax-efficient way you can pass on your business to them is what’s called a family limited partnership (FLP). These are shares that entitle the holder to a percentage of the business’s profits and can be transferred tax-free under the IRS annual gift tax exclusion. Find out more about FLPs here.

8. Utilize Life Insurance

None of us can predict when our own deaths will occur. And unfortunately, because accidents happen, it can sometimes leave even the best-laid plans to waste when suddenly a parent or income provider is no longer in the picture.

This is why if you’d like to ensure your family’s wealth preservation, then you’re definitely going to want to have a life insurance policy in place. Life insurance should be used to replace 10-15 times the annual salary of each working adult. The idea is that your survivors could continue to pay the mortgage, bills, and other expenses for approximately the next 10-15 years despite the sudden loss of income.

There are many different types of insurance policies: Term, whole life, universal, etc. When you’re young and just starting a family, generally a low-cost term policy is all that’s needed. It should also be the most affordable option since you’ll most likely be in better health than you might be relative to when you’re older.

As you get older, you may want to consider forming an irrevocable life insurance trust (ILIT). An ILIT is a trust that owns a life insurance policy that can be used to pay your estate taxes as well as distribute the policy benefits to your beneficiaries outside of probate. You can find out more about ILITs here.

9. Protect Your Estate

Along with life insurance, it will also help to preserve your wealth if you take the time to do some estate planning activities.

A great place to start is to make sure that beneficiaries are named for every financial account you have: Bank, investment, retirement, etc. The majority of these institutions will allow you to set up primary and secondary beneficiaries so that you can list your spouse first followed by your children second.

Another thing that every family should have is a will. Your will is a legal document that expresses your final wishes for your assets. It also names the executor of your estate who will serve as your representative during probate.

Wills are necessary, but they’re not perfect. They can be challenged by other family members, creditors, and even overruled by a judge.

If you’d like to save your survivors the grief of having to deal with these unfavorable situations, then you can take things to the next level by forming what’s called a revocable living trust. This is another type of trust where your assets will become the property of the trust upon death and then be distributed to your beneficiaries outside of probate. Click here to find out more about revocable living trusts.

Your Legacy of Creating Wealth for Your Family Starts Now!

Image of many adults and children at the beach – Expanding Wallet

Your wealth is the culmination of all that you’ve worked towards throughout your lifetime. In a way, passing it on to future generations is like giving a piece of yourself in the most selfless way imaginable.

But creating generational wealth isn’t going to happen on its own. To do it right is going to take time, discipline, and sacrifice. It will also involve a lot of planning and forward thinking.

That all begins right now. No matter what your financial situation is currently, forget the past and instead take control of what the future could be. Not only will this help you one day achieve financial freedom, but it can also help future generations to come. That’s truly a legacy worth creating.

Key Next Actions:

  1. Write down some or all of the strategies mentioned above that you want to utilize.
  2. Prioritize the list by most important to least important for you.
  3. Set a date on when you are going to start implementing your highest priority item.
  4. Finish one item then move to the next strategy.
  5. Remember, “When money realizes that it is in good hands, it wants to stay and multiply in those hands.” ― Idowu Koyenikan

LEARN all that you can, BELIEVE in yourself, and take actions that allow you to GROW!

Get your FREE copy of the 5 Keys To Success Guide (click here).

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Hi, I'm Andrew

Founder of Expanding Wallet

Hi, I'm Andrew

Founder of Expanding Wallet

Here at Expanding Wallet, our mission is to inspire greatness and encourage actions that will grow dreams into existence. We strive to provide information that can be used to create a strong financial foundation.

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